Gift a Taco, Take a Taco

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By Orlando Gotay, Tax Attorney

Gifts are so cool. Everyone loves gifts. Would you believe Uncle Sam does, too? So much so, that there is a gift tax—different from the income tax.

The scheme is fairly complex, but the main thing people should remember is that there is an annual exclusion of $14,000 per gift. If your gift is worth less than that, no need to worry. You can gift everyone in New York City $14,000 each and owe no gift tax. Also, donors are on the hook for any tax, not recipients.

If your gift is over that amount, a lifetime “unified credit” takes care of the tax bill until the credit is used up. Gifts in amounts over the exclusion need to be reported to the IRS on a gift tax return.

Gifts between spouses are generally unlimited and not subject to the gift tax. Here comes one of the “buts”: If your spouse is not a US citizen, special rules apply. Instead of an unlimited amount, the annual exclusion is $149,000. Those need to be reported but no tax is paid on those.

Now, the reverse: If you, US citizen, receive a gift (or a bequest) from a nonresident alien, greater than $100,000, it must be reported. No tax is due on such gift or bequest, but the penalty for not reporting it is pretty steep, up to 25 percent of the value of the gift.

Knowing these “gift” rules in the special context of “US” versus “non US” can be critical. For instance, a gift over the exclusion amount can be divided between spouses: each can gift a person up to $14,000 each for a total of $28,000 per year. Also, nothing prevents you from gifting on Dec. 31, making another gift the following day, all without going over the exclusion.

If you are planning to transfer wealth to others during your life, it is also important to know there are special exclusions and procedures from the gift tax. In the case of payments made as tuition for someone else or medical care, those present excellent opportunities to gift wisely, tax-free.

Some states tax gifts, too. It is wise to check.

Pricewaterhouse Coopers reports there is no gift tax as such in Mexico—so far. If your gift is large enough, $4,616 (!) it may end up having Mexican income tax consequences. If your gift involves more than one country, several sets of rules may apply. It always pays to check ahead of time, not after the taco has been given away.

Orlando Gotay is a California licensed tax attorney (with a Master of Laws in Taxation) admitted to practice before the IRS, the U.S. Tax Court and other taxing agencies. His love of things Mexican has led him to devote part of his practice to the tax matters of U.S. expats in Mexico. He can be reached at tax@orlandogotay.com or Facebook: GotayTaxLawyer.